7% SWR? No problem! Just a few caveats...

[Nords]

I've had a free subscription to "Wealth Manager" for several years. Bloomberg sold out so it's become a conduit for Highline Media's aggressive junk mail marketing. However it's a valuable insight into the thinking of financial advisors as explained by the FAs themselves. I'd highly recommend signing up for your own free subscription just to see what the industry is up to, and (unlike many marketers) Highline Media promptly stops the junkmail when you ask them to do so. I usually find at least one interesting article a month and many interesting FA attitudes toward their clients.

Wealth Manager

This month's jewel is an article questioning the conventional 4% SWR asset-allocation wisdom (stocks, bonds, cash) and proposing an alternative "DIESEL" portfolio of the following indices:
- S&P500,
- DFA Small Cap Index,
- MSCI EAFE,
- NAREIT,
- Goldman Sachs Commodity Index,
- Citigroup Composite Bond Index, and
- 3-month Treasuries.

Raddr's website also contains data indicating that more asset classes improve overall portfolio return & volatility, which may lead to a higher SWR, but the problem is getting enough historical data to "prove" it. Heck, people aren't happy with FIRECalc's 125+ years of data!

I'm going to assume that each DIESEL portfolio asset was equally weighted (about 14%) although the authors don't explicitly state that. Retirees maintain about five months' expenses in cash, and quarterly withdrawals also rebalance the winners back to the intended AA. The study covers a whopping 35 years between 1972-2007.

The authors claim that the portfolio survived a 7% starting rate that was raised each year by 3%. Their logic for 3% was that (1) using the CPI in the 1970s-80s would have quickly bankrupted the 4% SWR crowd as well as the 7% visionaries, and (2) retirees' spending doesn't rise after age 70. ("As long as major medical and long-term care risks are properly insured.") 3% seems like a reasonable compromise to them since it's 75% of the 50-year CPI average.

Here's some other interesting claims:
- "Current actuarial tables are based on stale data that bears little resemblance to today’s actual landscape in terms of the health of older Americans."
- "Not once in my 30 years in the industry has a client cited the CPI as a reason for any increase in cash flow from a portfolio."
- "Implementation of the system requires consolidation of investment assets at one institution."
- "Withdrawals began at 7 percent of beginning value and increased 3 per cent annually with no taxes, fees or transaction costs included."
- "Simplification becomes increasingly important as retirees age and become less interested in the details of their financial processes." followed by
- "Of course, the DIESEL system takes some work: Properly trained staff, with one group assigned to review and calculate the required funds for each DIR and another assigned to making the portfolio changes necessary to generate these funds for the withdrawal account." Real simple.
- "A key component of the process must be ... an accompanying caveat to retirees that, despite historical support for the reliability of the system, significant or sustained portfolio declines may require reduction in monthly withdrawals." and finally
- "But isn’t it worth the effort to give your clients a retirement plan designed for the 21st century?"

OK, everyone, let's get out there and spend!

You go first.

[unclemick]

- mine don't promise 7% or even admit who they are - but I got four free tickets to a classy BBQ place:

'potentially outperform the stock market'

'identify annuties that are bad for you'

'guarantee an income stream to outlive you or your spouse'

'reduce or possibly eliminate the taxes you may be paying on your Social Security'

It was my favorite restaurant(after trying several) when we were staying in the Ramada in the weeks after Katrina. Great BBQ.

heh heh heh - 'an educational seminar with no attempts to sell specific products' Sure you betcha . First open date 9/11 4:00 P.M.

[Delawaredave5]

Skimming the article - I could not find the percentages of the portfolio in each of the asset classes ? Anybody see ?

Equal proportions ?

[packrat44]

Quote:

Originally Posted by unclemick - mine don't promise 7% or even admit who they are - but I got four free tickets to a classy BBQ place: 'potentially outperform the stock market' potentially? 'identify annuties that are bad for you' That one is easy. 'guarantee an income stream to outlive you or your spouse' That one is easy also. However, you may have to live in poverty or call Dr K to help shorten your life. 'reduce or possibly eliminate the taxes you may be paying on your Social Security' Again easy to do. If you receive minimal income, you pay no taxes. It was my favorite restaurant(after trying several) when we were staying in the Ramada in the weeks after Katrina. Great BBQ. heh heh heh - 'an educational seminar with no attempts to sell specific products' Sure you betcha . First open date 9/11 4:00 P.M.

At least you had great BBQ

[chinaco]

Here is a fairly good treatment on the subject of DIESEL from FPA.

FPA Journal - DIESEL: A System for Generating Cash Flow During Retirement

[fluffy]

The problem, as Nords mentioned, is the fairly short backtest period. There's plenty of AAs one could find in 1972-2005 that are probably even better than this. For example, as I posted before: 60% 2-year Treasuries, 10% SCV, 10% REIT, 20% Emerging resulted in 12.08% CAGR with just 8.04% St. Dev. for 1972-2006 (according to Diehards asset allocation backtest spreadsheet), which should allow even higher SWR than "DIESEL". Although I admit that DIESEL comes closer to market-weight AA.

[haha]

"Financial Planning" is a highly entrpreneurial field. Anyone can sit down with a computer, some data, and a Monte Carlo engine and find something to write an article or book about, then go out and start collecting clients on the basis of his amazing new discovery. The so called DIESEL system is just one example. There are so many stupid unprovable assertions made that it is useless to consider it.

Once a salesperson asserts things that are clearly impossible to prove, the customer should know that he is either a fool or a knave. In either case customer should get away from him.

On the face of it DIESEL seems to be a poor cousin of the sustainable "growing dividend startegy". It is for clients whose wants are greater than the current sustainable earnings of their portfolios. Nothing new there. With dividends at historical lows it is quite dificult to amass a large enough dividend and TIPS portfolio to support an attractive lifestyle. So FP entrepreneur asserts that income doesn't matter, just cash flow. With this, aren't we back to the total return philosphy of periodic liquidation of portfolio components to support withdrawals?

If only cash flow matters, and not income as defined by sustainablilty, buy a woodlot and harvest all the trees. Huge cash flow right now- but for the next 40 years you will have only outflows.

Ha

[heyyou]

I did like the recognition of diversified portfolios, but then the data was mined for optimal survivorship. Lots of favorable assumptions about returns and taxes, followed by suggestions for office operations, then no consideration of investment expenses and planning fees. The article was light in too many places for me to trust the info. Other than the controversial WD rate, this is not a significant article. Must of been a slow month at JFP for this to be published.